Political and economic uncertainty continued to cause volatility in financial markets in July. However, equity markets remain supported due to the hunt for yield.
Review – Political risks weigh on emerging market equities
China’s regulatory offensive focusing on large technology companies as well as companies from the real estate and education sectors weighed heavily on regional stock markets. Not surprisingly, their valuations were exposed to political risk, which was difficult to accurately evaluate. Although the Chinese regulators tried to limit the damage and the markets stabilised at the end of the month, the MSCI Emerging Markets ultimately lost 6.7% in July. Although the heightened uncertainty was also reflected in equity markets of industrialized countries, these were recently weighed down rather by growth concerns due to rising COVID-19 case numbers. In the end, only for a short period of time and mainly at the expense of cyclical equity market regions such as Europe (+1.9 %). US equities (+2.3 %) on the other hand benefited from stronger capital in- flows into growth and technology companies, not least due to further declining (real) yields.
The decline in yields on the government bond markets continued in July. Ten-year U.S. government bonds fell below the 1.30 % mark in the course of the month, and German bunds of the same maturity have once again solidified clearly in negative territory. Investment grade bonds on both sides of the Atlantic (EUR +0.8 % / USD +0.7%) benefited strongly from this development. Emerging market bonds also ended the month in positive territory (+0.5 %) despite high uncertainty in the Asian region. High yield bonds also posted a positive return of 0.4 % in July. However, a slight increase in credit risk premiums weighed somewhat on the asset class recently.
The commodity sector (+1.8 %) remained supported despite eco- nomic uncertainty in July. After an initial period of weakness due to the expansion of the oil production by the OPEC+ countries, the price of crude oil rose (+1.6%) compared to the previous month. Gold (+3.3 %) has also been able to stabilise in recent weeks after the heavy losses in June and ended the month slightly above USD 1800 per troy ounce.